In year 1, AMC will earn $2000 before interest and taxes. The market expects these earnings to
Question:
a. If AMC were an all-equity (unlevered) firm, what would its market value be?
b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC’s debt is expected to grow by 3% per year, at what rate are its interest payments expected to grow?
c. Even though AMC’s debt is riskless (the firm will not default), the future growth of AMC’s debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC’s assets, what is the present value of AMC’s interest tax shield?
d. Using the APV method, what is AMC’s total market value, VL? What is the market value of AMC’s equity?
e. What is AMC’s WACC?
f. Using the WACC method, what is the expected return for AMC equity?
g. Show that the following holds for AMC:
βA = (E / D+E)βE + (D / D+E)βD
h. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part f to derive the market value of equity using the FTE method. How does that compare to your answer in part d?
Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Question Posted: